Can land misallocation be a greater barrier to development than capital? Evidence from manufacturing firms in Sri Lanka

Ranpati Dewage Thilini Sumudu Kumari, Shawn Xiaoguang Chen, Bei Li, Sam Hak Kan Tang

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

We quantify cross-firm misallocation in land and compare it with that in capital. Misallocation arises when a production factor produces greater marginal revenue product (MRP) in some firms than in others because the former firms have to pay a higher shadow production factor price which is usually distorted by persistent institutional factors. Consequently, the aggregate total factor productivity (TFP) could be increased through cross-firm factor reallocation within an industry. Existing literature mainly emphasizes the misallocation in capital and labour, or in agricultural land. Little is done to quantify the misallocation of industrial land. By using annual-firm-level survey data from Sri Lanka's manufacturing sector over 1994–2015, we find that the aggregate TFP gain from reallocating land is about five times of that from capital. Further, we find that firms can hardly grow bigger due to size-dependent land distortion. The results suggest that land distortion can be a crucial barrier to development.

Original languageEnglish
Article number106368
JournalEconomic Modelling
Volume126
DOIs
Publication statusPublished - Sept 2023

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